DGT criteria on personal income tax in situations caused by COVID-19

The Directorate General for Taxation has been consulted on the receipt of benefits in the event of termination of self-employed activity or ERTE, reinvestment in the main residence or in annuities, days of economic activity, agreements to reduce or defer payment of rent, tax residence or the deduction of certain expenses.

2-year period for exemption for reinvestment in the principal residence

Art. 38 LIRPF provides for the exemption of the capital gain obtained in the transfer of the main residence provided that the amount obtained is reinvested in the acquisition of a new main residence within 2 years before or after the transfer of the main residence.

By virtue of RRDD-Law 8 and 15/2020, the periods of limitation and expiry of the actions and rights provided for in the tax regulations were suspended, and the aforementioned 2-year period was suspended from 14 March 2020 until 30 May 2020. The DGT has expressed its opinion on this matter in various consultations: DGT V3659-20, of 29 December, DGT V2767-20, of 10 September, DGT V1117-20, of 28 April, DGT V1118-20, of 28 April, DGT V1115-20, of 28 April, DGT V1232-20, of 4 May, DGT V2837-20 of 22 September, DGT V3587-20 of 17 December, DGT V3659-20 of 29 December, DGT V0033-21 of 15 January and DGT V0084-21 of 22 January.

6-month deadline for annuity reinvestment exemption

The legally established 6-month period for reinvestment in annuities was also suspended during the state of alarm. Thus, the calculation of the period for reinvestment in annuities from 14 March 2020 to 30 May 2020 must be understood to be suspended (DGT V2034-20 of 19 June 2020).

Time limit for calculating the period during which the economic activity is to be carried out

The calendar days in which the state of alarm has been declared are not computed in the quarters of the fractioned payments on account of personal income tax (IRPF) and VAT payments on account in 2020. Specifically, in the first quarter of 2020, 18 days must be excluded from the total of 91. Therefore, the reduction to be applied in the payments of both taxes will be 18/91 part (DGT V1971-20, of 16 June and DGT V1101-20, of 28 April).

The quarterly payments on account of Personal Income Tax to be made by taxpayers who determine the net income by the objective assessment method are calculated in the fourth quarter of 2020 and are normally calculated without counting as days of activity the calendar days in which the effective exercise of the economic activity has been suspended as a result of the measures adopted by the competent authority to correct the evolution of the epidemiological situation derived from the COVID. Only the number of calendar days of the quarter in which the activity has been carried out will be taken into account for the calculation of the quarterly instalment payment of personal income tax (DGT V0082-21, of 22 January).

Rent reduction or deferral agreements

As a result of the difficult economic situation of the tenants due to the health crisis caused by COVID-19, it has been possible to reduce or defer the payment of the rent.

In case of a reduction of the rental price, the lessor shall reflect as full performance (income) during these months the new amounts agreed by the parties, whatever their amount. In case of deferred payment, the lessor shall impute the full return (income) for these months according to the due date of the new instalments agreed by the parties. In both cases, the necessary expenses will continue to be deductible and the imputation of real estate income will not be applicable as the property continues to be leased (DGT V0985-20, of 21 April and DGT V1553-20, of 22 May).

Another case would be where the lessor does not agree to modify or reduce the amount fixed as the rental price (whatever the amount of the reduction) or agree to defer payment of the rent, resulting in the non-payment of the rent when it is due. In the event of non-payment of rent:

1º. The taxpayer must allocate in 2020, as full income from real estate capital, the amounts corresponding to the lease of the premises, even if they have not been received.

2º. Doubtful balances may be deducted as an expense from the full income calculated after the aforementioned three-month period has elapsed, or when the debtor is in insolvency proceedings.

If the debt is collected after it has been deducted as an expense, the income must be taken into account in the year in which it is collected.

In the case of non-payment, as in the other two cases (modification of the amount of the rent and deferral of its payment), the expenses incurred in that period may be deducted, without the imputation of real estate income provided for in Article 85 of the LIRPF being applicable, and the reduction established in the aforementioned Article 23.2 of the LIRPF is applicable in the case of rental of property used for housing (DGT V0081-21, of 22 January).

Deduction of supplies by professional

The cost of supplies for the home where the economic activity has been carried out during COVID-19 is not deductible due to not being able to go to the professional office. In the case of occasional use of the usual residence for the development of the economic activity, in the event of the impossibility of going to the office after the declaration of the state of alarm, the DGT has considered that the cost of the supplies used is not deductible, as the residence is not partially affected by the activity, being used for an occasional and exceptional circumstance (DGT V3461-20, of 30 November).

Tax residence

The time spent by tourists in Spain due to the state of alarm counts for the purpose of determining the stay of more than 183 days within Spanish territory. If they have spent more than 183 days in Spain in 2020, they will be considered IRPF taxpayers (DGT V1983-20, of 17 June).

Vehicle income tax

The vehicle transferred for private use will be taxed as income in kind during the period of the state of alarm, even if the vehicle was immobilised. The declaration of a state of alarm does not imply the immobilisation of the vehicle and it is irrelevant, for the purposes of taxation as payment in kind, whether or not it has been used for private purposes (DGT V1387-20, of 13 May).

Second residences

The declaration of the state of alarm due to the health crisis resulting from COVID-19 has no effect on the imputation of property income of owners of second homes, which are not rented or used for any economic activity and which are not the owner’s habitual residence.

Therefore, and as DGT V1474-20 of 19 May 2020 concludes: “the imputation of property income does not take into account the effective use of the second home but rather its availability to its owner, without the Law taking into account circumstances that may affect such use, such as illness, work or others that determine the impossibility of using it due to limited mobility as a result of the State of Alarm”, the imputation of property income provided for in art. 85 of the LIRPF is applicable.

ERTE benefits

Erroneous payments made by the SEPE in 2020 will not be taken into account in the 2020 income tax return, if the Administration has already declared the payment invalid. As the receipt of the aforementioned amounts has not yet been declared, as they have been collected in 2020, pending declaration, no action will be taken in relation to Personal Income Tax, and they will not be reflected in the 2020 tax return once they have been declared invalid by the paying administration, as they are not considered income (DGT V0016-21, of 13 January).

Cessation of self-employed activity

In several consultations, the DGT has determined that the extraordinary benefit is considered to be income from work as it is an unemployment benefit in the broad sense, and not only in the sense of the situation of cessation of activity corresponding to employees (DGT V0098-21, of 28 January, DGT V0101-21, of 28 January or DGT V0099-21, of 28 January).

In addition, DGT V0071-21, of 22 January, analyses what happens in cases where there has been an exemption from payment of the self-employed contribution. The total or partial exclusion of the payment of RETA contributions derived from a lack of obligation or exemption, determines its lack of incidence in the tax as it does not correspond to any of the cases of obtaining income established in art. 6 LIRPF, not having therefore the nature of full income nor correlatively that of a deductible expense for the determination of income.

Exclusion from the objective assessment scheme

In a case in which the interested party was excluded from the objective assessment method in 2019, due to having exceeded in 2018 the magnitude for volume of gross income and in 2020, due to COVID-19, the volume of gross income has not exceeded the magnitude that excludes the method. In accordance with art. 34 RIRPF, the taxpayer concerned will be excluded from the objective assessment method for at least the following three years. In this case, the cause of exclusion occurred in 2018, so that in the following three years (2019, 2020 and 2021), the interested party must determine the net income from the activity by the direct assessment method, regardless of whether in these tax periods the magnitudes that delimit the scope of application of the method were met. Therefore, in 2021, the interested party must determine the net income from its activity by the direct estimation method (DGT V0028-21, of 15 January).

DGT V0128-21, of 29 January, explains that the exceptional measure relating to the reduction of the tax periods affected by the renunciation of the objective assessment method in Personal Income Tax for 2020 and 2021, established in art. 10 RDL 35/2020, is only envisaged for cases of renunciation of the objective assessment method for the 2020 and 2021 tax periods and does not affect the causes for exclusion from the objective assessment method.

Subsidies received due to suspension of activity or drop in income

The Auton levied subsidies for the self-employed with difficulties, which include, among other contingencies, the suspension of activity or a drop in income as a result of the COVID-19 epidemic. If the subsidy is applied to offset expenses for the year or loss of income, it will be treated as a current subsidy, i.e. as income for the year. If it is intended to favour investments in fixed assets or expenditure with a multiannual projection, it shall be treated as a capital grant and shall be charged to the extent that the investments are depreciated or the expenditure incurred against it is incurred. Where the assets are not subject to depreciation, the grant shall be fully expensed in the year in which the asset financed by the grant is disposed of or written off (DGT V0105-21 of 28 January).

Retention rate

Regarding the withholding rate applicable in the case of extension of temporary contracts as a result of COVID-19, DGT V3049-20, of 8 October, has expressed its opinion. Within the framework of the implementation of dual employment workshops in the Autonomous Community of Galicia, on 2 December 2019, the City Council concerned, as the promoting entity, hired teaching and management staff for a period of nine months for the implementation of a workshop. In the case in question, the minimum rate of 2% has been applied to the salaries of the initial nine-month contract of the teaching and management staff, and the question now arises as to the applicability of this minimum rate in the extension of the contract for the time of the suspension of the delivery of the workshop. In this respect, it should be pointed out that this circumstance (the extension) is one of those which makes it necessary to regularise the withholding tax rate. As for the rate resulting from the regularisation, the minimum rate of 2 per cent will continue to apply as the extension is also for a period of less than one year.